With the need to reduce fossil fuels usage on a global scale, maintaining low electricity rates is one of the most powerful incentives governments can use, CME says. PHOTO courtesy Okuma.
Some consider the race to build the clean economy to be one of the most significant economic transformations since the Industrial Revolution. In Canada both federal and provincial governments have proposed incentives to encourage manufacturers to build clean technology, though many federal tax credits are not operational and do not fully close the gap in incentives between Canada and the US.
At the same time, the policies implemented to rapidly decarbonize have already begun to create added layers of costs on manufacturers, which impact their ability to compete, argues Canadian Manufacturers & Exporters (CME) in its recently published report Manufacturing Ontario’s Future: Leveraging an Advanced Manufacturing Strategy for Growth and Prosperity.
“If Ontario wants to lead in creating a prosperous clean energy economy by 2050, it must continue acting aggressively in lowering the costs of doing business, especially in areas that will impact decarbonization – energy, tax incentives, infrastructure to support the EV supply chain, and carbon management tools,” CME states in its report.
The report is focused on Ontario as the province is the engine of Canada’s manufacturing growth, representing close to 45% of the country’s manufacturing output. The province, however, is 20 years past its prime with the province’s manufacturing GDP peaking two decades ago. Although there has been considerable effort over the past two years, particularly with automotive manufacturing investments, to recapture the province’s manufacturing glory, “there is a lot of lost time to make up for”, as Canadian Manufacturers & Exporters (CME) points out.
Shopmetaltech.com is outlining CME’s insights and recommendations in three separate instalments, closely examining each of the three pillars of investing in Ontario-made growth, expanding and upskilling the manufacturing workforce, and lowering carbon while lowering costs. Our initial report covered the first pillar: Investing in Ontario-made growth. Our second report dealt with Upskilling Ontario’s manufacturing workforce. Our final report deals with the third pillar: Lower Carbon and Lower Costs.
MANAGE THE COSTS OF THE ENERGY TRANSITION
With the need to reduce fossil fuels usage on a global scale, maintaining low electricity rates is one of the most powerful incentives governments can use, CME says. It points out that although Ontario has a largely decarbonized grid, rates are currently among the highest in North America, and do not provide enough of a discount versus residential rates as investors have come to expect from competing US states.
“This can only get worse given the current rate structure which automatically flows capital costs to rates through Global Adjustment charges,” CME states in the report.
In its Pathways to Decarbonization report, IESO estimated that expanding Ontario’s grid to meet the needs of a decarbonizing economy will require a combined investment of $375-425 billion by 2050. The US government meanwhile has expressed its intention to lower electricity rates by 9% by 2030. “To support competitiveness, Ontario should establish a predictable industrial manufacturing rate, bringing the cost structure for large and small manufacturers more in line with what is charged elsewhere in North America,” CME advises in its report. It offers four recommendations to deal with that.
- Implement a subsidized electricity rate to attract and keep manufacturing investment in Ontario. This rate should be competitive with comparable rates offered by neighbouring provinces and U.S. states (i.e., in the $0.06 to $0.10/KWh range).
- Build on Power Purchase Agreements (PPAs) and Clean Energy Credits (CEC) to accelerate the development of renewable energy while providing more flexible options for manufacturers to lower costs and meet corporate social responsibility objectives.
- Establish a Recharge Ontario pilot project (emulating the New York State program in the same name) allocating a block of energy on a competitive basis to meet economic development benchmarks, in connection with Ontario’s Advanced Manufacturing strategy and consultation with industry.
- Extract the actual carbon expense from the Hourly Ontario Energy Price (HOEP), and account for it separately as a line item on customer bills to more transparently allow ratepayers to reduce consumption and save for hours of the day when natural gas is on the margin.
ONTARIO TAX REVIEW SHOULD IMPROVE COMPETITIVENESS FOR THE LONG-TERM
In Budget 2023, the Government of Ontario announced its intention to review its tax framework. CME says it welcomes this process, “as several elements in the design of Ontario’s tax system have evolved to work against its current policy push to reward productivity improvements and innovation by manufacturers.”
Guiding the tax review, CME advises, should be a push to bring overall taxation in line with more competitive US states, where personal income taxes are lower, and investment attraction programs are simpler to navigate. To keep up, Ontario should continue to streamline its tax code, ensuring incentives to work and innovate in Ontario are easy to understand, stackable, certain over the term, and as technology neutral as possible. CME offers three more recommendations.
- Innovation and Commercialization – Expand the Ontario Innovation Tax Credit (ITC) and combine it with the Ontario Research and Development ITC to create a single, more effective credit for all activities of innovation.
- Personal Income Tax – Phase out the personal income surtax to allow employers to be more competitive in attracting and keeping skilled labour.
- Property Tax – Restore certainty and competitiveness of industrial real estate of square foot basis versus other North American jurisdictions with a managed transition to yearly assessments and removing the obsolete Business Education Tax (BET)
CONNECT THE EV SUPPLY CHAIN TO A BROAD MANUFACTURING BASE
The federal government set a target for 35% of medium and heavy-duty vehicles (MHDVs) to be zeroemission by 2030, and 100% by 2040. According to recent modelling, however, current adoption trends are not on track.
“While the federal government, Quebec, British Columbia and the US (through the Inflation Reduction Act) have all introduced purchase incentives, the Ontario government has not followed. Further, there is currently a lack of hydrogen fueling stations and no widespread adoption incentives targeted to manufacturing companies under Ontario’s LowCarbon Hydrogen strategy,” CME points out. “Companies interested in adopting hydrogen applications and becoming local hubs for refueling are currently left to fend for themselves, without a clear path to secure supply. The net result is continued growth in the stock of diesel vehicles, despite their heavy environmental impact.”
CME says as the province invests massively in electric vehicle manufacturing, the province would benefit in aligning its incentives to develop the adoption of diesel alternatives such as vehicles powered by electricity, hydrogen or other low carbon fuels such as biogas and offers two recommendations it believes would help the province get there:
- Introduce a provincial purchase incentive for heavyduty Zero Carbon Vehicles leveling the playing field with Quebec and British Columbia, including broad eligibility for plug-in hybrid vehicles, or vehicles powered with other low carbon fuels. The amount of the incentive should be decided at a level that topsup federal incentives enough to compete with the incentives available in the U.S.
- Invest in low carbon charging/re-fueling stations at manufacturing facilities and industrial parks to accelerate network development using market forces, co-locating supply with potential sources of demand.
ACCELERATE THE DEVELOPMENT OF CARBON
Despite efforts to decarbonize industrial processes, CME says many industries such as iron and steel, have no alternative but to rely on carbon capture to reach net-zero emissions while maintaining production. This is due in part to the requirement for high temperature heat and inherent process emissions that cannot be avoided with a switch to renewable energy sources.
According to a recent study from the Canadian Centre for Economic Analysis, there is massive upside in creating a functional Carbon Capture, Utilisation and Storage (CCUS) infrastructure to decarbonize hard to abate manufacturing sectors in Ontario, CME says in its report. It adds that the study calculated $218 billion in direct, indirect, and induced economic benefits and $95 billion in new investment to gain between 2024 and 2050. The study predicts a 24% loss of GDP benefit with a three-year delay in setting up enabling infrastructure.
Some industries such as iron and steel, have no alternative but to rely on carbon capture to reach net-zero emissions while maintaining production so for them carbon capture is a more viable solution to reduce emissions, CME says. PHOTO by Pexels.
“Despite recent action by the Ministry of Natural Resources and Forestry to create a regulatory framework for carbon capture, the approach has been so far limited to small scale pilot projects on private lands. While Alberta is taking a leading position, it is still unclear when Ontario will be ready to deploy infrastructure at scale and become eligible for the federal CCUS tax credit. Those efforts should be accelerated, keeping in mind the need for a targeted approach given high capital costs and more constrained pore space availability in Ontario versus western provinces,” CME says and offers the following recommendations:
- Accelerate the transition to large scale deployment by vesting all underground pore spaces under provincial control, including Crown and private land as Western provinces did (BC, Alberta, Saskatchewan).
- Bring a whole-government-approach to make proper legislative and regulatory amendments in collaboration with industry, proactively building the regulatory ability to oversee CCUS applications (e.g. Mining Act, EPS treatment, regulatory oversight).
- Deploy a public awareness campaign in partnership with industry in support of a safe and timely deployment of carbon capture technology in Ontario.